Lessors: Prepare For Federal Gov't Holdovers Amid Pandemic

06 August 2021 Law360 News

This article originally appeared in Law360 on August 6,2021. It is republished here with permission.

As a side effect of the uncertainties in the commercial real estate market due to the COVID-19 pandemic, federal government agencies occupying commercial office space may well decide to remain in place despite expiration of their respective leases.

As federal agencies struggle to deal with the implications of COVID-19, particularly the Delta variant, in a host of contexts, remaining in their current premises can be a relatively easy decision compared to moving to a new facility under a new lease.

Indeed, the current crisis comes on the heels of a widespread federal agency practice of using lease holdovers — where the federal tenant occupies space without a contractual agreement with the lessor — and lease extensions as devices to address internal agency lease management issues or gain advantage in lease renewal negotiations.

Years before COVID-19 hit, the U.S. Government Accountability Office highlighted the significant number of leases by the U.S. General Services Administration, the federal government's primary leasing agency, that result in holdovers and extensions.[1] The GAO noted that many of these resulted from agency-generated delays or impasses with lessors in lease renewal negotiations, and underscored that a lease-holdover status is particularly to be avoided as it can result in an adversarial relationship with the private lessor.

The GAO's spot-on assessment holds particular force in the current uncertain, charged atmosphere of the COVID-19 pandemic. Accordingly, lessors of real property to federal agencies need to be familiar with the legal landscape underlying the federal government's status as a commercial property tenant, and the tools available for avoiding, and if necessary dealing with, a holdover federal agency tenant.

The Government's Duty to Vacate at the End of a Lease

Federal courts have repeatedly recognized that every fixed term lease between a commercial landlord and the federal government inherently includes an implied duty to vacate at the end of the fixed term "unless the parties explicitly express an intention to the contrary."[2]

Thus, the first question is whether the lease with the agency modifies that implied duty by including a holdover clause or provision in the lease, as the inclusion of an express holdover clause takes precedence over the implied duty and serves to dictate the landlord's remedies for a government holdover.

In essence, a holdover clause or provision governing the terms of a holdover period — after the expiration or termination of the lease — represents an agreement that the agency tenant is not obligated to vacate after the lease term expires or terminates, so long as the agency complies with the holdover clause and other terms of the lease.

For example, U.S. Postal Service leases frequently contain a holdover clause permitting the USPS to remain in possession of the leased property after the expiration or termination of the lease. The USPS form lease includes an illustrative example of a holdover clause:

Holding Over. If the Postal Service remains in possession of the Premises or any part thereof after the expiration of the term, with or without the written consent of Landlord, such occupancy shall be on all the terms of this Lease with the exception that the Postal Service will continue to pay either the last rental rate in effect prior to the expiration or termination of the Lease or the fair market value (as determined by the Postal Service in its sole, but reasonable, discretion) of the leasehold, whichever is higher. If the parties agree to and execute a new lease or a lease extension, the rent paid during the holdover period will be adjusted to reflect the rate negotiated by the parties for the new lease or lease extension, and the difference, if any, will be paid to Landlord along with the new rent for the new lease or lease extension, or credited to the Postal Service, if applicable. The Postal Service may terminate the Lease during the holdover period upon 60 days' prior written notice to Landlord without any liability hereunder to Landlord. Failure by the Postal Service to deliver keys to the Premises to Landlord or to remove its personal property therefrom at the end of the Lease term shall not be construed as an act of holdover by the Postal Service.[3]

If a government lease contains such a holdover clause, the government tenant would be within its rights to remain in possession of the leased premises after the lease term ends, and its obligations to the landlord would be governed by the terms of the holdover clause.

On the other hand, when a federal agency lease does not contain a holdover clause or other indication that the government tenant can remain in possession after the term of the lease ends, the government tenant is, as noted above, obligated to vacate the premises under the implied duty to vacate inherent in every fixed term lease.[4]

The U.S. Court of Appeals for the Federal Circuit and the U.S. Court of Federal Claims have recognized that when a government tenant has a duty to vacate the property at the end of the lease term, "it necessarily follows that such a failure to vacate is a breach of that contractual duty, which will subject the breaching party to liability for holding over."[5]

Boards of contract appeals similarly have recognized that a government tenant that remains in possession of the leased premises after the expiration of the lease's fixed term has breached the implied duty to vacate the premises.[6]

All that said, unlike with a typical commercial lease, a landlord does not have an eviction remedy against a federal agency tenant based on a breach of the implied duty to vacate at the end of a lease. Rather, because federal leases are subject to the Contract Disputes Act, the primary remedy for the agency's failure to vacate after the lease term ends is a monetary claim for breach of a duty implied in the lease, not an equitable remedy.[7]

Under the act, the landlord is required to submit a Contract Disputes Act claim to the agency contracting officer as the first step in pursuing a monetary claim action under the lease.[8]

Should the contracting officer deny or fail to timely decide the claim, or grant less than the full amount sought, the landlord may appeal the contracting officer's decision to the COFC, which is the only court with jurisdiction over contract claims against the U.S. government based upon an express or implied contract with the U.S.

Alternatively, the landlord could appeal a decision on a contract claim to a board of contract appeals.[9] Both the COFC and the boards of contract appeals lack the authority to order the U.S. government to vacate property, leaving a contractor landlord with only a monetary remedy.[10]

Monetary Remedies Available to the Landlord

The COFC and boards have taken different approaches on the legal theories underlying a claim for a federal tenant holding over the leased property and breaching the implied duty to vacate. The applicable theory can influence the recoverable damages.

In some cases, a federal tenant that holds over property is treated as a so-called tenant-at sufferance, and under the legal theory that there is no lease that governs the holdover period.[11] A tenant-at-sufferance holds over without the consent of the landlord, rendering the former tenant similar to a trespasser.[12] Without a lease governing the holdover period, a landlord is owed the reasonable rental value of the property, as determined by the applicable commercial market, for the holdover period the property is occupied by the tenant-at-sufferance.[13]

Note, however, that, as a tenancy-at-sufferance is not governed by any lease, if the expired lease expressly obligated the federal tenant to perform maintenance or contribute to taxes or utilities, such express obligations arguably would not continue to apply during the tenancy-at-sufferance, and instead such claims would be based built into the market rental rate for holdover situations.

In other cases, the COFC has applied the terms of the expired lease to the holdover period, which results in the continuation of the rental rate in effect prior to the expiration of the lease.[14] Under this approach, the holdover tenancy would be governed by the expired lease unless it is replaced by statute, a new agreement or an express holdover provision in the expired lease.[15]

The Federal Circuit has not yet addressed whether the tenant-at-sufferance theory or the terms of the expired lease govern the holdover period when a federal tenant holds over leased property and the lease does not include a holdover clause. So, unless the lease defines which approach applies — and some do — the landlord could argue for application of the more favorable approach.

A landlord may also be able to recover other monetary damages besides rent for the government agency's holdover occupancy.

In 2019, the Postal Service Board of Contract Appeals, recognizing that a landlord generally has no avenue to evict or eject a government tenant, found in Nationwide Postal Management v. U.S. Postal Service that the landlord is further harmed by the uncertainty caused by the potentially indefinite duration of a holdover occupancy.[16]

To compensate the landlord for such uncertainty, the Postal Service Board of Contract Appeals allowed the landlord to recover a premium of 30% — on top of current market value rent — for the indefinite duration of the holdover period.[17]

In April, the Civilian Board of Contract Appeals adopted this same approach in 1125 15th Street LLC v. GSA, and applied a 5% premium on top of the fair market value rental value of the holdover tenancy to provide the landlord some compensation for the uncertainty of the holdover tenancy.[18]

A landlord could also potentially recover special or consequential damages as a result of a holdover tenancy if they were foreseeable by the government tenant at the time the lease is executed.[19]

For example, in its 1984 decision in Klein v. GSA, the General Services Board of Contract Appeals found a federal agency tenant liable for consequential damages due to water damage caused by the government, which was a holdover tenant at the time, vacating the premises in winter without notifying the landlord.[20]

Whether special or consequential damages were foreseeable depends on the specific facts of the matter, and could be difficult to recover if the circumstances of the property have changed over the course of the lease.

Also, if a federal agency tenant continues to occupy the leased premises for a considerable period after the expiration of the lease, at some point the holdover could ripen into a takings claim under the takings clause of the 5th Amendment of the U.S. Constitution.[21] Where the government deprives a landlord all use of its property, even for a temporary or finite period of time, the government is required to provide just compensation to the landowner for such use.[22]

However, while the COFC may find that a federal tenant has taken a landlord's property within the context of the 5th Amendment by failing to vacate the premises, the court will likely treat the takings claim as an alternative ground to the breach of contract claim. In that case, the court may impose just compensation under the takings clause only to the extent it may exceed what the landlord is otherwise entitled to for a breach of the implied duty to vacate the premises.[23]

Preparing for a Possible Government Holdover

Given the difficulty, if not impossibility, of evicting a government tenant, a landlord leasing real property to a government tenant should take steps to prepare for the possibility of a government holdover as the lease nears the end of the fixed term. The landlord should remind the federal agency's contracting officer, in writing, of the impending end date of the lease term and underscore that the landlord expects the federal tenant to vacate the premises upon the expiration of the lease.

If the federal agency holds over the property after the expiration of the lease, the landlord should explicitly state in writing to the contracting officer that the landlord has not consented to the holdover, and that the agency has become a tenant-at-sufferance. Such notice may help with a later argument that the federal agency is obligated to pay the market-value rent, rather than just the rental value provided under the expired lease.

If the lease does not contain a holdover clause, the landlord may also propose what it deems the appropriate rental amount and other remedies due to the agency's pending holdover. In almost all cases, the landlord should submit to the contracting officer a so called request for equitable adjustment to the expired lease, or REA, which is a form of a settlement proposal outlining proposed terms to govern the holdover period.

Such an REA can, and routinely should, be submitted shortly before the expiration of the lease. A significant benefit of an REA is that the legal, accounting and consultant costs for preparing the REA can be included in the REA and recovered from the federal government.

Alternatively, the landlord may choose to submit a Contracts Disputes Act claim for damages because of the holdover — or if REA negotiations are unsuccessful, convert the REA into a claim.

If the lease does contain a holdover clause, but the holdover clause does not contain a fixed time period for the holdover tenancy, the landlord may want to seek an equitable adjustment to the lease to add in a fixed end point to the holdover tenancy.

If successful, such a lease amendment could avoid an indefinite, unending holdover tenancy that is seemingly with the consent of the landlord because of the holdover clause.

Finally, as noted above, federal tenants, citing the COVID-19 pandemic's impact, may be inclined to remain in their currently leased premises irrespective of the lease term, likely resulting in an increase in federal agency holdovers in the near future and a corresponding increase in Contract Disputes Act disputes relating to government holdovers.

An uptick in lease disputes, and appeals therefrom, could lead to changes to the government lease case law referenced herein and perhaps enhance remedies available to landlords leasing real property to government tenants.

David T. Ralston Jr. is a partner and Julia Di Vito is an associate at Foley & Lardner LLP.

Disclosure: The authors regularly represent parties in actions against government agencies similar to those discussed in this article and currently represent parties in ongoing matters against the USPS and the DOD.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] GAO Report 15-741: Federal Real Property — Performance Goals and Targets Needed to Help Stem GSA's Reliance of Lease Extensions and Holdovers (September 2015). GAO Report 15-741 examined leases by GSA, the federal government's primary leasing agency, during the period of fiscal year 2012 to fiscal year 2014. GAO determined that of the 2,719 leases expiring during that period, a remarkable 54% had been in a holdover, holdover plus extension or extension status. Id. at 12, Figure 3. Of that 54%, 19% had been in a pure holdover status, 25% had been in a holdover status, followed by an agreed extension status, and 56% had an agreed extension prior to lease termination. The leases that had experienced agency holdovers (i.e., the 19% in holdover status plus the 25% in holdover status followed by agreed extension leases) represented more than 23% of all GSA leases reviewed during that period.

[2] Stromness MPO, LLC v. U.S., 134 Fed. Cl. 219, 280 (2017) (quoting Prudential Ins. Co. v. U.S., 801 F.2d 1295, 1299 (Fed. Cir. 1986)).

[3] USPS Lease (Single-Tenant Form) (February 2017) and USPS Lease (Multi-Tenant Form) (February 2017).

[4] Stromness MPO, LLC, 134 Fed. Cl. at 280.

[5] Prudential Ins. Co., 801 F.2d at 1300; Allenfield Associates v. U.S., 40 Fed. Cl. 471, 486 (1998).

[6] Nationwide Postal Mgmt. v. U.S. Postal Service, PSBCA No. 6645, 19-1 BCA ¶ 37320; Cafritz Co. v. General Services Admin., GSBCA No. 13525, 97-1 BCA ¶ 28680; Embarcadero Center, Ltd., GSBCA No. 8526, 89-1 BCA ¶ 21,362.

[7] In the unlikely event the COFC lacked jurisdiction over a monetary dispute arising out of a government lease, such as because the landlord having filed an earlier action against the federal agency in U.S. District Court (see, 28 U.S.C. § 1500), the landlord might theoretically be able to bring an eviction action against the federal agency in U.S. District Court.

[8] Forman v. U.S., 767 F.2d 875, 879 (Fed. Cir. 1985) (holding Contract Disputes Act applies to lease agreements); 41 U.S.C. § 7103.

[9] 41 U.S.C. § 7104(a), (b)(1).

[10] Looks Great Services, Inc. v. U.S., 145 Fed. Cl. 324, 328 (2019) (holding plaintiff appealing Contract Disputes Act claim failed to raise a valid claim for equitable relief); Stephanatos v. U.S., 81 Fed. Cl. 440, 445 (2008), aff'd, 306 F. App'x 560 (Fed. Cir. 2009) ("In other words, the Court of Federal Claims has no authority to grant equitable relief unless it is tied and subordinate to a money judgment."); Minute Man Properties, L.P. Lease Agreement, PSBCA No. 6296, 11-1 B.C.A. ¶ 34684; Versar, Inc., ASBCA No. 56857, 10-1 BCA ¶ 34,437; Rig Masters, Inc., ASBCA 52891, 01-2 BCA ¶ 31,468.

[11] Allenfield, 40 Fed. Cl. at 486 (citing 51C C.J.S. Landlord & Tenant § 177, at 490).

[12] Klein v. General Services Admin., GSBCA No. 6614, 84-2 BCA ¶ 17273.

[13] Allenfield, 40 Fed. Cl. at 487 (citing 49 Am. Jur. 2d Landlord and Tenant § 369, at 326 (1995); 3 Milton R. Friedman, Friedman on Leases § 18.2, at 1103 (3d ed. 1990)); 1125 15th Street, LLC v. General Services Admin., CBCA No. 6012, 2021 WL 1328453; Cafritz Co. v. General Services Admin., GSBCA No. 13525-REM, 98-2 BCA ¶ 29936; Klein v. General Services Admin., supra.

[14] Stromness MPO, 134 Fed. Cl. at 279 (holding the terms of the expired lease applied to a period when the U.S. Postal Service retained space that it should have returned to the landlord); Modeer v. U.S., 68 Fed. Cl. 131, 142 (2005), aff'd, 183 Fed. App'x 975 (Fed. Cir. 2006) ("It is a well settled general principle of law that when a tenant holds over after the expiration of his lease with the express or implied consent of the landlord and without any new or different agreement as to rent, the terms of the old lease will apply.") (citing Garrity v. U.S., 67 F.Supp. 821, 822 (1946)).

[15] Stromness MPO, 134 Fed. Cl. at 279.

[16] Nationwide Postal Mgmt. v. U.S. Postal Service, PSBCA No. 6645, 19-1 BCA ¶ 37320.

[17] Id.

[18] 1125 15th Street, LLC v. General Services Admin., supra.

[19] Prudential Ins. Co., 801 F.2d at 1300.

[20] Klein v. General Services Admin., supra.

[21] Prudential Ins. Co., 801 F.2d at 1300 n.13.

[22] Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537 (2005); Allenfield, 40 Fed. Cl. at 487.

[23] Stromness MPO, 134 Fed. Cl. at 258 (holding the proper remedy for a lease holdover lies in contract and not in a takings theory); Allenfield, 40 Fed. Cl. at 488 (holding the government's failure to vacate the premises constituted both a breach of contract and a temporary taking, but that the plaintiff's damages would be based on the breach of contract and not the takings claim).

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